Earnings Recession Is a Non-Event: 1Q Results Are Flat

Strong economy overcomes predictions of a down quarter and may push up profits ahead.

When is so-so news actually good news? The first-quarter earnings season, now drawing to a close, is flat compared to the year-before period. That sounds underwhelming. But it has beaten the original projections of a 4% to 5% decline.

With 92% of the S&P 500 reporting results, the first quarter averts fears of a so-called earnings recession, at least for now. That means two consecutive quarters of reduced earnings. And now many observers expect decent corporate earnings to continue for the rest of the year.

The performance of the benchmark for large-cap stocks surely owes much to the ongoing strength of the economy, which grew 3.2% in the January-March quarter, with a very low unemployment rate of 3.6%. And if the US-China trade deal, now stalled, ends up going through, that will be a nice propellant for the S&P 500 and other stock indexes.

The original earnings estimates rested on the assumption that the effect of the 2017 tax cut—the corporate rate was sliced to 21% from 35%—would peter out. The thinking was that the boost in earnings (2018’s last quarter was up 20.5%) was a temporary “sugar high” owing to the lighter tax burden.

“We consider earnings season a success based on the amount of upside to prior estimates generated by S&P 500 companies despite several headwinds,” wrote John Lynch, LPL Financial’s chief investment strategist, in a research note.

The latest results belie festering problems, namely the strong dollar, which has hampered offshore earnings when shifted into US currency, and slower growth overseas, in particular in Europe and China.

Lynch pointed out that, if the trade war keeps going, profits in the year’s latter half could be pulled down.

For now, though, the buoyant earnings per share increases for the first quarter are a plus for the market, which has been roiled by the trade talks stalemate. FactSet Research is heartened that 76% of the companies reporting have EPS growth that’s above the five-year average.